Understanding the Balance Sheet for the FAR CPA Exam
Kyle Ashcraft, CPA · 2019 CPA Exam Scores · 95 FAR · 98 BEC · 91 REG · 90 AUD
The balance sheet — also called the statement of financial position — is a snapshot of a company's assets, liabilities, and equity at a single point in time. It's a cornerstone financial statement on the FAR section of the CPA exam.
What are the three sections of the balance sheet?
Every balance sheet is organized into three sections:
- Assets — resources the company owns or controls
- Liabilities — obligations the company owes
- Equity — the residual interest left over for owners
Assets
Assets are resources expected to provide future economic benefit, classified as current or non-current:
- Current assets: cash, accounts receivable, inventory
- Non-current assets: property, plant, and equipment (PP&E), intangible assets
Example: purchasing inventory
- Debit Inventory $5,000
- Credit Accounts Payable $5,000
Liabilities
Liabilities are obligations a company must settle in the future, also split into current and non-current:
- Current liabilities: accounts payable, short-term debt
- Non-current liabilities: long-term debt, deferred tax liabilities
Example: issuing long-term debt
- Debit Cash $20,000
- Credit Long-Term Debt $20,000
Equity
Equity is the residual interest in a company's assets after subtracting liabilities. It primarily includes common stock, retained earnings, and additional paid-in capital.
Example: issuing common stock
- Debit Cash $12,000
- Credit Common Stock $10,000
- Credit Additional Paid-In Capital $2,000
What is the accounting equation?
The balance sheet is built on one equation that must always hold:
This isn't just a formatting rule — it's a built-in error-detection mechanism. If a balance sheet doesn't balance, something was recorded incorrectly.
Worked example
Say a company reports:
- Current assets: $10,000
- Non-current assets: $50,000
- Current liabilities: $6,000
- Non-current liabilities: $20,000
Rearranging the accounting equation to solve for equity:
What disclosures accompany the balance sheet?
Under U.S. GAAP, companies must disclose the accounting methods used, asset valuation techniques, and contingent liabilities, among other items — context a bare set of numbers can't provide on its own.
Every balance sheet reduces to Assets = Liabilities + Equity. On the exam, expect questions that ask you to classify an account as current vs. non-current, or to solve for a missing piece of the equation.
Want the full FAR framework?
My free CPA 101 course covers the study approach I used to score 90+ on every CPA exam section.
Kyle Ashcraft, CPA scored 90 or above on every section of the CPA exam in 2019, including a 95 on FAR. He is the founder and sole instructor of Maxwell CPA Review, a complete CPA review course covering all six sections, where he creates every lecture, textbook and study outline himself.
